Our meetings with policymakers and the management suggest that while a bottom-up blueprint spelling out external prerequisites to double Coal India’s production by FY20 was a much-needed ‘first step’, a road map by the Centre for build-out of rail links (evacuation infrastructure) is the need of the hour. Still, persisting impetus for engagement between central/state/ local authorities to address factors limiting CIL’s output bode well.
We expect a reasonable hike in FSA (fuel sale agreement) coal prices over 12-18 months (ahead of wage revisions in FY17) and Ebitda margin to be supported by moderation of diesel prices. The overhang of GoI divesting at least 4.65% stake in CIL to meet the free float norm looms, but we believe CIL remains a good long-haul story. Our SOTP (sum-of-the-parts)-based new TP (target price) is R417 (down 6%), the implied 12-month return (including dividend) is 22%.
FY15/16 normalised EPS cut by 9%/16%: For FY15F/16F (forecast), we lower our normalised Ebitda estimate by 9%/14% and normalised EPS estimate by 9%/16%; FY15F-17F normalised Ebitda/EPS CAGRs are 12%/10%. In the backdrop of GoI’s ongoing impetus to double CIL’s production by FY20, we raise our FY16F-20F coal offtake forecast by 3.3% (our forecasts are considerably conservative vs. GoI’s blueprint for CIL), but we lower our FSA sales realisation forecast by 6-13% over this period.
Valuation multiples could remain above historical range: On normalised FY17F earnings, CIL trades at 6.6x EV/Ebitda and 10.6x P/E (EPS: R33.5); 1-year forward multiples continue to hover in the upper end of respective historical ranges. CIL’s FY16F/17F FCFE (free cash flow-to-equity) yield is 4%/10%. For FY17F, relative to its Indonesian peers, CIL trades at a 7% premium on normalised EV/Ebitda but makes a higher RoE (return of equity).